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In the land of the blind . . .

2011 April 18
by Roger Valdez

 

< Improvements in assessed valuation don't mean more property tax revenue in Washington >

In the closing days of last year I made an investment of time that has had a dubious payout. You see, I read the entire Property Tax Levy Manual (careful it’s a huge file). Now I have arcane information about Washington State property tax rattling around my head. So when I read Dan’s recent Citytank post about property tax and Peter Katz’ analysis in Florida I couldn’t help but raise my hand in the back of the class and go “ooh, ooh!.” A little knowledge is a dangerous thing. Or, as wise sage once told me, “in the land of the blind, the one eyed man is king.”

Katz’ argument that developing mixed-use instead of shopping malls will improve the tax base isn’t true in Washington State. Why is that? Hint: it’s the same reason Tax Increment Financing doesn’t work in Washington State either.

Washington state and local government collects its property taxes in the reverse order of the way we usually think of property tax collection. Usually we think of our house or farm as having a set tax rate. Say my rate is 1 percent. If my property is worth $100,000 I pay $1000 in property taxes each year. If the value of my property goes up, I pay more tax. A doubling in my property value from $100,000 to $200,000 means the local government collecting that 1 percent levy on my property will see $2000 next year instead of $1000. This system is called a “rate based system.”

That doesn’t happen in Washington because our constitution requires uniform taxation. The way we’ve chosen to deal with that requirement is to start with a tax district budget first, then assess a levy on all the value in the district uniformly. If a taxing district has an annual budget of $100,000,000 they can levy taxes on all the property value in the district uniformly. That means a guy with a house that is worth $500,000 pays more than I do if my house is worth $100,000 but we still pay the same amount per $1000 of assessed value. From year to year local taxing districts can increase their levy by only 1 percent per year. But the tax on my property goes up or down based not on its increase in value but the budget of the local taxing district.

What also affects my bill is the increase and decrease of the assessed value of all the property in the taxing district. Strangely enough, if the value goes up I could pay less in property taxes because there is more value to tax, and if the assessed value drops my taxes might actually go up for the opposite reason.

No matter how much value I add to a piece of property it doesn’t affect how much taxes flow into local government coffers. Remember, those can only increase 1 percent from year to year. And local taxing districts can’t capture the increases in property value from mixed use, shopping malls, or even public infrastructure improvements.

This is a shame. Because it takes away one of the best arguments smart growth folks have to push for different development patterns: money! In Washington some local officials might not understand the property tax system (remember the land of the blind?), but the argument won’t make it past smart staff at the state Department of Revenue. This uniformity issue in Washington’s constitution also stymies Tax Increment Financing too, making it impossible to capture the increases in private property value from public improvements.

It is important for policy makers to understand how tax revenue varies by land use. But for Washington State to take property tax revenue advantages of the benefits of good planning and development, and Tax Increment Financing, we’re going to need to update our constitution for the 21st century.

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Roger Valdez is currently reading his way through Seattle’s Land Use Code, most recently getting through SMC 23.49 the chapter covering downtown zoning.

10 Responses leave one →
  1. Stephen Fesler permalink
    April 18, 2011

    I read that twice and I still don’t understand. Do you mind give us tables or some graphic to better explain this? I’d like to think I’m not an idiot, but I don’t full understand the difference.

    • April 18, 2011

      I know. I made my head hurt.

      In this Sightline post I actually use tables:http://daily.sightline.org/daily_score/archive/2010/12/24/uniform-taxation-a-tif-problem-to-solve

      The simplest way I can put it is that in Washington we don’t get more property tax revenue when assessed property values go up.

      That’s because we start here with a whole number, the budget, which is levied against the value. So your property taxes aren’t assessed at a fixed rate, but are based on what the taxing district needs.

      • April 18, 2011

        “it” made my head hurt.

      • JoshMahar permalink
        April 18, 2011

        Roger, I should get in touch with you later about this for a project but real quick:

        Is it possible that under current law you could somehow tie the “taxing district needs” to property values as a round about way of implementing a land value tax?

        • April 18, 2011

          Right now land value tax in Washington would be problematic to implement for the same reason Tax Increment Financing is problematic. Taxing districts in Washington can’t tax parcels only assessed value of ALL the property in the district.

          This means if you try to tax a property owner who leaves his property a parking lot rather than building it to highest and best use, you run afoul of the constitution’s uniformity clause. You simply can’t get that one guy’s property taxes higher. It can’t happen.

          So land value tax is kind of a non-starter without a constitutional amendment to address uniformity.

          All of this comes with a big “I think” in front of it….

  2. Steve Mooney permalink
    April 18, 2011

    But doesn’t this mean that all else being the same, if anybody else’s valuation goes up my taxes go down? If I understand this correctly, this is an equally good argument for smart growth: if my neighbor subdivides his large-lot $250,000 rambler and builds 10 $400,000 townhouses, the overall value my taxing district assesses taxes on is now $3,750,000 richer, my $250,000 rambler is a smaller proportion of the budget, and I’m left with more cash. (Admittedly, not much more cash, but some, depending on the district size.) So I still have an incentive to support smart growth, just for more selfish reasons and less because I’ll get public infrastructure benefits, right?

    Or am I missing something?

    • April 18, 2011

      Steve,

      I think you are right. Based on Katz’ work I think we could say that mixed use development would boost the overall assessed valuation, which could lower everyone’s property taxes.

      I think message “grow smart, lower your taxes” is an appealing one.

  3. abrenna1 permalink
    April 18, 2011

    I actually think this system has a lot of benefits. A sharp rise in property values does not result in a sharp rise in property taxes. This limits the likelihood of a backlash producing a California Prop 13-style system that makes raising local revenues almost impossible and gives extreme preference to longer-term residents. It also prevents a reliance on constantly rising property values to pay for increased spending (again this shows up in California where rising property values hid the pernicious effects of Prop 13 for decades) and prevents revenue declines when values fall. While the calculations for the Washington State system are confusing, I would argue the results are actually more transparent. If you want revenues to go up you have to make the argument for raising taxes. In the long run I think this “honesty” actually makes people more trusting of taxation.
    Unfortunately, state revenue is more reliant on the sales tax system which does fluctuate dramatically with changing retail fortunes.

    • April 18, 2011

      Really great comment.

      The intent of the framers of the state’s constitution was exactly what you described. All taxes are unfair for someone somewhere at some time. The goal is to limit that as much as possible and create a fair, understandable tax.

      Our system should give people comfort that they are not being taxed more as the value of their property goes up. But people, largely, don’t get that. So interestingly, Democratic Governor Gregoire and the Democratic legislature passed the Eyeman initiative that limited the levy to 1 percent per year, down fro 6 percent per year. This was largely, I think, because people don’t get that the 1 percent is on the levy, not the growth of their personal property tax.

      And yes, we rely way too much on the sales tax which Democrats have continually increased because they won’t impose other taxes legislatively.

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